Our financial control framework
Our financial control framework describes the process for how Export Finance Australia operates, from assessing and managing risk to capital management.
Financial control framework
At Export Finance Australia, we have a financial control framework that describes the process for how we operate. It includes everything from assessing and managing risk to capital management, large exposure and financial statements.
Assessing and managing risk
The assessment and underwriting of risk is central to our financial control framework. All the transactions we underwrite are reviewed by our Board or by our Executive team in accordance with delegated authorities from our Board.
Our Chief Economist assesses country risk, while our Executive team reviews large or complex transactions.
Contingent liability and loan ceilings
We operate within a strong regulatory environment. The controls imposed include:
- regulations from the Export Finance Australia’s Regulations 1991 under sections 68 and 69 of the Export Finance Australia Corporation Act 1991 (EFIC Act). This limits the total amount of Commercial Account loans we can make and sets the maximum contingent liability we can carry under Commercial Account insurance contracts we enter into and guarantees we give
- approvals from the Finance Minister under section 59 of the EFIC Act. This limits the types and amount of funding we can obtain under various borrowing programs
- directions from our Minister in accordance with section 9(2) of the EFIC Act.
Our treasury activities are carried out within the control framework approved by our Board and compliant with the EFIC Act, the Public Governance, Performance and Accountability Act 2013 (PGPA Act) and associated approvals required from the Australian Government.
Within this framework, we aim to minimise the cost of funding our loan assets on both the Commercial Account and National Interest Account and to maximise the return on our investments. This includes funds representing our equity, reserves and working capital.
In transacting on wholesale markets, Treasury confines risk within Board and Executive approved limits and does not trade speculatively.
The framework for our funding activities conducted by Treasury is set out within section 61 of the EFIC Act which states that ‘Export Finance and Insurance Corporation must not borrow or raise money except under section 58 or 59’.
Section 58 allows the Finance Minister to lend money to Export Finance Australia from money appropriated by the Federal Government.
Section 59 allows Export Finance Australia to borrow or raise money subject to written approval from the Finance Minister. To date, we have funded our activities under section 59 approvals.
We borrow in the global debt capital market to fund our lending operations. The core function of Treasury is to prudently raise funding at competitive rates and to manage the investment of capital and reserves and the surplus liquidity portfolio.
Treasury uses derivative products to minimise currency and interest rate risks arising from our core businesses and treasury’s funding and investing operations. Our power to enter into derivatives transactions comes from our general powers in section 11 of the EFIC Act.
Our Executive team reports the results of treasury operations to our Board regularly.
Foreign exchange and interest rate movement
The loans we provide to customers, and the rescheduled debts, are mostly denominated in foreign currencies.
We do not take currency exposure on our assets and liabilities. We eliminate foreign exchange exposure by borrowing in the same currency as the assets or by borrowing in another currency. We use cross-currency swaps and other foreign exchange instruments to remove the foreign exchange exposures.
We also use interest rate swaps and futures to match the interest rate profiles of our liabilities with those of our loans.
Under Section 62 of the EFIC Act, the Commonwealth guarantees the due payment by Export Finance Australia of any money that becomes payable, including our borrowings from third parties. The main borrowing instruments currently used are medium-term notes issued in the capital markets and euro-commercial paper.
The main reason we borrow money is to fund loans made to exporters or buyers of Australian exports on either the Commercial Account or the National Interest Account.
Funding may also be necessary when contingent liabilities such as export finance guarantees provided to banks to support the financing of Australian export trade are called and we need to pay out the bank.
For this reason we are required to have additional funding capacity available to cover the possibility of borrower defaults and subsequent calls by lending banks on our guarantees.
We also maintain a diversified funding capability with spare capacity to ensure that we have a flexible and robust funding model that can accommodate a degree of disruption to financial markets and enable a range of pricing and risk management strategies.
We are authorised to raise funds from our approved commercial paper borrowing facilities in advance of loan funding needs. This facility was introduced in 1990 to maintain a minimum market presence and enhance the effectiveness and robustness of our funding model.
Investments and liquidity
From an accounting perspective, treasury investments are treated as ‘available-for-sale’ and are required to be ‘marked to market’ with gains and losses reflected through equity not profit and loss.
Our policy is to hold our investments to maturity, but they can be sold if necessary. Assuming there aren’t any credit defaults, any ‘unrealised’ gains or losses caused by revaluations will not be realised.
The investment approval issued by the Finance Minister under the PGPA Act requires our treasury investments to be in entities rated AA- or better, or ADIs rated BBB- or better.
Our approach to capital management is based around assessing the level of and appetite for risk and ensuring that the level and quality of capital is appropriate to that risk profile.
Prudent practice also requires that capital management be forward looking, having regard to changes in strategy, business plans and the operating environment as well as changes in the type, amount and concentration of risk that might impact on the capital resources available.
Capital also supports the operations by providing a buffer to absorb unanticipated losses from its normal business activities.
In the event that cash capital is insufficient, our Board, in consultation with the Government, may call additional cash capital up to a prescribed amount.
We are also supported by a Commonwealth guarantee that protects third parties from any financial loss in the event we cannot meet our obligations. This guarantee has never been called.
Our Board is required to ensure that our capital and reserves, at any time, are sufficient according to sound commercial principles under Section 56 of the EFIC Act.
We are required to maintain sufficient capital and reserves to meet our likely liabilities and provide for the possibility of loan defaults.
The approach we apply is to set our own standards by drawing on the prudential standards set by the Australian Prudential Regulation Authority (APRA) and the Bank for International Settlements through the Basel Committee on Banking Supervision (Basel Committee).
Our Board treats the capital as equivalent to the regulatory capital under APRA guidelines and uses this as the basis for setting risk tolerances regarding large exposures.
When making this assessment, our Board is required to include as equity the $1.2 billion of callable capital that is available from the Commonwealth in accordance with the provisions of Section 54(8)(a) of the EFIC Act.
Our callable capital is an amount specified in the EFIC Act that the Government will make available to us if we are unable to meet our expected losses or liabilities.
It is a requirement under the EFIC Act that in calculating our total capital amounts specified as callable capital are included in that capital calculation.
Our maximum liability is set at $6.5 billion for our activities on the Commercial Account. This cap is set by Export Finance and Insurance Corporation Regulations 1991.
The requirement to hold sufficient capital and reserves only relates to our CA activities. We do not hold capital against the NIA exposures as the risks are borne by the Commonwealth.
For more information on our capital adequacy, see Note 20 of the ‘Financial statements’ section of our Annual Report.
We model our large exposure policy on APRA guidelines. Australian banks are required to consult with APRA before committing to any aggregate exposures to non-government, non-bank counterparties exceeding 10% of their capital base.
APRA has also indicated a maximum exposure per non-bank counterparty (or related group of counterparties) of 25% of capital but has emphasised that this is an upper limit. Only better rated risks would be contemplated for these levels of exposures.
Our Board allows a small tolerance above the internal limits for large exposures to account for foreign exchange movements, given the majority of our large exposures are in foreign currency against an Australian dollar capital base. Our Board is also prepared to consider exceptional cases.
Under current delegations, our Board must approve all transactions that involve commitments valued at over $50 million.
Our financial statements are published every year in our Annual Report, which is tabled in parliament and available on our website. The financial statements are audited by the Australian National Audit Office (ANAO).
Under section 55 of the EFIC Act, our Board is required to make a recommendation by written notice to our Minister as to whether or not we pay a specified dividend to the Federal Government for that financial year.
Our Minister replies in writing to either ‘approve’ the recommendation or ‘direct’ the payment of a different specified dividend.